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Y/E Valution of Stock held by ESOP and earmarked cash reserves


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Group:

I did not see a specific area to post this so I've posted here.

And I may not be asking the question properly so please bear with me.

12/31 fincls/tax return reflects $400k in bank account of entity owned by ESOP.

These are funds that were just paid into account and going to be used as loans for business purpose.

I recall a discussion some time ago on a similar issue but not sure if there was a complete answer

other than "it depends".

For valuation purposes, can the appraiser make the statement and assessment that those

funds are earmarked and not part of the overall valuation?   Which will reduce the overall value.

 

Also, I apologize that this is off topic, but I've recently had a contractor I worked with leave

the profession and am looking for a project-based individual with experience in ERISA/ESOP

related valuations and research. I am trying the Benefits Link job posting for the first time

and thought I'd add my request here. 

Thoughts and comments appreciated.

 

 

 

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Tax Cowboy:

I don't understand your statement "These are funds that were just paid into account and going to be used as loans for business purpose.."  Regardless, let me share with you my understanding of how  an appraisal firm will value cash when completing an ESOP valaution/appraisal.

The appraiser will determine the amount of cash needed to fund routine/normal business operations. They will take into consideration Cap X expenditures, etc. .  Any amount of cash held by the business that is in excess of said amount will be defined as "excess cash".  Generally, excess cash is added dollar for dollar to the valuation after determining the enterprise value.  

I think the question then becomes, will the 400k described in your post be defined as excess cash by the ESOP appraiser.  Why don't you ask them?

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9 hours ago, Tax Cowboy said:

Group:

I did not see a specific area to post this so I've posted here.

And I may not be asking the question properly so please bear with me.

12/31 fincls/tax return reflects $400k in bank account of entity owned by ESOP.

These are funds that were just paid into account and going to be used as loans for business purpose.

I recall a discussion some time ago on a similar issue but not sure if there was a complete answer

other than "it depends".

For valuation purposes, can the appraiser make the statement and assessment that those

funds are earmarked and not part of the overall valuation?   Which will reduce the overall value.

 

 

 

 

 

It certainly isn't clear what's going on from your incomplete data.  I bolded a sentence above. I'm going to take it that this $400,000 is a LOAN to the company (from the bank?  from PPP? doesn't matter actually!).  If it's a loan to the company, it does not affect the value of the company.  The assets go up by $400k, but so do the liabilities. Net effect is zero.  So I'm going to ignore the rest of your posting because if this is correct, the rest of it is just not applicable.  If you want to provide more, different details, maybe you will get a different answer.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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I would ask the appraiser.   They are very open about the method they use to value a company.  They have to be open about it.  The trustee is required to understand what they did to get the value and determine if the inputs, assumptions... leading up to the value are appropriate and reflect FMV. 

I go to multiple ESOP conferences a year so I know most of the big names in the ESOP appraisal world and they are all open with their clients/trustees on how the value is determined and what could change the value. 

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Of course $400k in cash that belongs to the company is part of its value. If the cash is lent out for appropriate business reasons, the debit to cash will be offset by equal credit to loans or receivables as asset. They'd better be.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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16 hours ago, Luke Bailey said:

Of course $400k in cash that belongs to the company is part of its value. If the cash is lent out for appropriate business reasons, the debit to cash will be offset by equal credit to loans or receivables as asset. They'd better be.

I wish the OP will respond.  He says this is new money that was just deposited into the account and talks about  using them as "loans".  So, if what he really means is that the company just borrowed $400k and it is sitting in their account, then, as I said earlier, that does NOT really affect the value of the company, since the assets might be increased by $400k, but so are the liabilities. LOANS to businesses do not increase the VALUE of said business.  But of course, we really have no idea what the OP really means since his OP is so short of details!

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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On ‎5‎/‎23‎/‎2020 at 9:25 AM, Larry Starr said:

I wish the OP will respond.  He says this is new money that was just deposited into the account and talks about  using them as "loans".  So, if what he really means is that the company just borrowed $400k and it is sitting in their account, then, as I said earlier, that does NOT really affect the value of the company, since the assets might be increased by $400k, but so are the liabilities. LOANS to businesses do not increase the VALUE of said business.  But of course, we really have no idea what the OP really means since his OP is so short of details!

Sure, Larry. More facts would be good, and if the funds were borrowed, there is an offsetting liability. And of course, typically book value is just one component of value, along with market comparables and discounted cash flow.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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I read the above question as suggesting that the 400K will be invested in loans.  The cash and subsequent loan would be considered an asset of the company and may be part of the valuation of the company stock by the valuation firm.  

 

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2 hours ago, Degrand said:

I read the above question as suggesting that the 400K will be invested in loans.  The cash and subsequent loan would be considered an asset of the company and may be part of the valuation of the company stock by the valuation firm.  

 

It's now 8 days later and the OP hasn't clarified his post.  Annoying at best!

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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  • 4 weeks later...

I apologize for not getting back to my original post. One of the responses helped me tremendously by stating that the excess cash as of 12/31 can reduce the valuation if those funds are considered routine/normal biz operations including capital expenditures. Thank you again. 

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